The Value Of A Bank Essay example

1214 Words Dec 4th, 2016 5 Pages
There are two main ways that a bank can be classified as insolvent. The first is if the worth of the bank 's assets and less that the worth of the bank 's liabilities. The second is if the bank cannot pay its debts, even if the bank 's assets are worth more than their liabilities, this is then a problem with the bank 's liquidity.
When analyzing the profitability or worth of a bank, book value is commonly used to understand the net worth of all the assets and liabilities that a bank holds on its balance sheet. However, there is one main issue that comes from using its book value as an accounting measure, which is the difference between book value and market value. The market value of the asset or liability is essentially what people are willing to buy that asset or liability from you in the current market, whereas the book value is the fair value, this is where differences can occur and can lead to a bank becoming economically insolvent even when the book value of its net worth is positive.

The market value or mark-to-market value basis, adjusts the values of the assets and liabilities each day reflecting current market conditions. In the case of Lehman Brothers credit risk played a large part in creating a difference between the book value and market values of its assets in 2008, resulting in their collapse. During the financial crisis, there was a very large peak of non-performing loans (NPL) on the balance sheet of banks, with the average percentage of NPL against…

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